Are you one of the many Americans anticipating a large refund come April 15th? Well, don’t spend it all yet! A large refund from the federal government may not be the windfall it may initially appear.
The Tax Cuts and Jobs Act is in its first year, and the agency predicts 150 million federal tax returns or more this year.
Already approximately 4.6 million refunds have been processed by the IRS, with the average check amount adding up to $1,865. For many Americans who were expecting to receive the same amount or more as last year, this was a happy turn.
Though there is another factor that would contribute to such a large refund, and that is that it’s likely that, over the course of the taxable 2018 year, too much money was taken out the first time,
As Tim Steffen, the director of advanced planning at Robert W. Baird & Co. put it: A big refund may seem like a nice bonus, but it’s just your own money coming back to you. This is akin to lending an interest-free loan to the IRS.
Withholding Your Balance
All working people should’ve filled out a W-4 form when they were first hired. It is through this form that you set up the withholding per paycheck you will put aside (or not) for taxes.
Yourself, your dependents, and your spouse are just a few of the personal allowances you can claim on this form. The more you claim, the less taxes are taken out of your gross paycheck. This can backfire, of course, because if you don’t pay enough over the course of the year come filing season you may end up owing the federal government the difference.
The Tax Cuts and Jobs Act has made this slightly more complicated; the tables it used to withhold funds, and the W-4 has changed from years prior to comply with the new regulations.
It might be an optimal time to go over your W-4 and find out if you’re withholding the right amount as you file this year, as the recent tax law has changed what you can personally exempt and raised your standard deduction.
Your Taxes From the Year Prior
If you were to ask Jeffery Levine, the director of financial planning at New York’s BluePrint Wealth Alliance, he’d tell you the best course of action is to pay on your taxes whatever your liability was from the year prior, so as to circumvent a possible penalty for under-paying.
This is not necessarily a fool-proof plan, and you could still end up owing money when April 15th comes, but at least here you wouldn’t have interest compounded or get penalized for not paying enough.
Because of the new laws possibly confusing earners this year, the IRS is waiving the penalty, as long as 85 percent of that liability was paid over the course of 2018.
As Chunk Rettig, the IRS Commissioner said, “This penalty waiver will help taxpayers who inadvertently didn’t have enough tax withheld.”
He also is imploring people reevaluating their withholding status to ensure that they have withheld the right amount of tax funds for the 2019 season.
So how does one evaluate their withholding status and ensure they don’t get penalized? Follow these few steps:
Review Your Return from 2018: It doesn’t matter if you got a big refund, or ended up owing the IRS, a quick review of your return from last year is an excellent guide as to what you withheld as you file under the new tax law.
W-4 Reevaluation: Your tax bracket is the combination of you, or you and your spouses earnings and is used to figure out the amount you can and should withhold. With these new changes to the tax code, you may be withholding too few funds for taxes, even if that means making slightly more on the paycheck level.
Consult an accountant: There is a $10,000 limit on local deductions, and a lot of the former itemized deductions have been done away with, under the new tax code. An accountant can determine what you could and should be withholding in order to comply with these new laws.
The standard deduction would be doubled this year, which would mean that less people filing are going to be itemizing their returns. According to the Urban-Brookings Tax Policy Center, 3 out of every 10 filers, or 49 million people, itemized their returns for the 2018 tax season. If you happen to be one of that 30 percent, allowances may have to be reevaluated to make sure the amount you’re withholding is correct.
This new tax code gets even more confusing when you factor in different income sources, rental property, or retirement funds. Steffan suggests paying an estimated quarterly amount on your taxes if this applies to you.
“In a perfect scenario, you’ll have a balance due when you file your return, but not one that’s large enough to create a penalty,” Steffan said.